Federalism of scale: What does the evidence suggest?

Andoni Montes Nebreda and Nerea Urrutia

No 53, OECD Working Papers on Fiscal Federalism from OECD Publishing

Abstract: This paper examines how economies and diseconomies of scale affect the efficiency of local public service delivery in multilevel governance systems. Drawing on a review of the literature, it shows that scale effects vary significantly across sectors depending on fixed costs, demand density, technology and service characteristics. The evidence supports a U-shaped relationship between scale and efficiency: small jurisdictions face higher unit costs, while large and dense ones incur congestion and coordination costs. The paper also highlights the trade-off between scale and fiscal decentralisation, as pooled provision may improve efficiency but reduce responsiveness and accountability. It assesses policy tools such as intermunicipal cooperation, reallocation of responsibilities, and mergers as ways to capture scale benefits while preserving local autonomy. It concludes that there is no single optimal jurisdiction size and that reforms should be service-specific and context-dependent.

Keywords: decentralisation; economies of scale; fiscal federalism; local public services; multilevel governance (search for similar items in EconPapers)
JEL-codes: H72 H75 H77 (search for similar items in EconPapers)
Date: 2026-06-10
New Economics Papers: this item is included in nep-inv
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Persistent link: https://EconPapers.repec.org/RePEc:oec:ctpaab:53-en

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